Tuesday, November 21, 2006

Internal memo blasts Yahoo

Is Yahoo suffering from a lack of focus, entrenched bureaucracy and redundancy?

It's a theory that's been aired for some time by investors and Internet industry executives to explain the Sunnyvale Web portal's dimming fortunes against rival Google Inc., among others.

Now Yahoo executive Brad Garlinghouse has acknowledged the problems in a scathing internal memo published by the Wall Street Journal, dubbed the "Peanut Butter Manifesto." In it, he says his company has spread itself too thin and must undergo a major reorganization, including cutting up to 20 percent of its workforce.

Garlinghouse, a senior vice president who oversees Yahoo's e-mail, home page and instant messenger service, circulated the memo to colleagues in October after a disappointing year. Yahoo shares are down 37 percent since January amid slow growth and a delay in a key project to boost online advertising revenue.

At the same time, Yahoo faces stiff competition from Google. In fact, by one important measure -- online advertising revenue -- Mountain View's Google has a commanding lead, according to eMarketer, a research firm, based on estimates for 2006.

Yahoo is expected to generate $3.37 billion in online advertising this year, excluding commissions it pays to partner Web sites. Google will take in $5.5 billion.

Then there's the rise of social networking, where Yahoo has trailed. Internet users have an increasing appetite for sites such as MySpace, which was acquired last year by News Corp. and has since catapulted in popularity.

Yahoo did not address the memo directly Monday, but issued a statement emphasizing progress in a variety of areas, including recent acquisitions and partnerships as well as the positive feedback it's received from customers regarding the introduction of a search engine advertising system, dubbed Project Panama. The system is supposed to make search ads more relevant, an area that Google excels at.

In his memo, Garlinghouse said that Yahoo's problems stem, in part, from trying to do too much, saying his company lacks a cohesive vision, is reactive and is separated into silos that frequently don't talk to each other and fight to protect their turf. "We've known this for years, talk about it incessantly, but do nothing to fundamentally address it," he said.

"I've heard the strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world," Garlinghouse wrote. "The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular."

He added, "I hate peanut butter."

Yahoo's rise to the most popular Web site has been built on its wide array of offerings, including e-mail, maps and finance. But some areas should be eliminated, according to Garlinghouse, who listed several that he said were duplicative, such as Yahoo's Flickr photo-sharing service and the Yahoo Photos area.

As part of his memo, Garlinghouse said that Yahoo must cut its workforce, currently numbering 11,000, by up to 20 percent. The company, he said, can be more efficient with fewer people who can get more done, more quickly.

Yahoo declined to comment about job cuts.

Ellen Siminoff, a former Yahoo executive who is chief executive of Efficient Frontier, a Mountain View company that helps advertisers manage search engine advertising, said Yahoo is in a period of transition. She said it has done well in one key area, search, but has had the misfortune of being up against Google, which she said has "executed in the 99th percentile" in terms of market share, innovation and generating revenue.

"The reality is that Yahoo has always been challenged by focus," Siminoff said. "There have always been a lot of products at Yahoo and it has always been a complicated business."

Indeed, when chief executive Terry Semel joined Yahoo five years ago, he immediately went about simplifying the structure, which originally had 44 units reporting to him. He eventually whittled the number to four.

Recently, Semel has voiced disappointment with Yahoo's performance, saying during a conference call in October that "we are not exploiting our considerable strengths as well as we should be." He then pointed to several areas the company should focus on.

It's unclear where Semel stands on the specifics in the Garlinghouse memo -- which includes a segment holding mangers more accountable for success -- or whether Garlinghouse has the authority to make any of his ideas happen. In the memo, he said that he hopes merely to "get the discussion going; change is needed and it is needed soon."

Jim Lanzone, chief executive of Ask.com, the Oakland search engine, said that other than the job cuts, the Peanut Butter Manifesto lacks details about how Yahoo would focus its products and business into "one nicely wrapped up strategy."

"Beyond e-mail," he said, "Yahoo has no obvious core."

"One of the reasons Yahoo is the No. 1 site online is that it is spread thinly," Lanzone said. "People use it for very disparate reasons, and that's a blessing and a curse."